The Disruption of GameStop
GameStop is a curious company to some it's a relic of the Glory Days of gaming before the arrival of the filthy casuals where only the most true and passionate of Gamers would line up at midnight in the cold in the rain to get their hands on the latest AAA title to others GameStop is a painful reminder of deep losses and a Timeless example of the institutional Market manipulation between hedge funds and stock Brokers and to a faithful few GameStop is the super stunk and hoddling is the best way to fight back against a game that has long been rigged against retail investors but the real question with GameStop that seemingly no one has bothered to answer is that beyond the headlines day trading and memes is there an actual business in this episode we'll cover the three eras of GameStop from its dominant control over gaming in the mid-2000s into an overextended mess throughout the 2010s and finally to present day where the company is deep in a last-ditch effort to reinvent itself as a tech startup and to restore relevancy diving headfirst into every Trend web 3 blockchain and nfts the fall of GameStop is as much a story about strategic mistakes as it is about Market disruption and abandonment when markets mature and vendors get the chance to cut out a middleman and keep more of the pie for themselves they will do so ruthlessly and aggressively even if that same middleman like GameStop was an invaluable partner for their own growth just years ago the story of GameStop begins in its dominant rule in the 2000s similar to Abercrombie and other mainstream brands at the time business was ruled by those with presence as proximity and availability mattered most in the era before e-commerce and delivery when it came to buying video games back then Best Buy Circuit City Walmart Toys R Us and Blockbuster and local Mom and Pops were all options but their inventory for video games was usually tiny or limited to one aisle GameStop was the only retailer to specialize in video games and carry not only the newest titles and consoles but also offered the largest collection of used games a trade-in program and a direct Outlet into the greater industry in the mid-2000s the company had over 3500 locations and by the early 2010s GameStop had scaled to over 4 400 locations nationwide overseas the company boasted equal omnipresence going from 800 stores in Australia Canada and Europe combined in 2006 to over 2000 in all three regions by 2012. to fit into perspective just how widespread GameStop was having 3 500 stores nationwide was four times the amount of Abercrombie and five times the amount of locations of Toys R Us and Best Buy in the mid-2000s there were half as many Gamestops as there were Starbucks in the United States back then most video games were offline single player titles with little replay value Upon finishing a game you could keep it on your shelf or you could recoup some costs by selling it to someone else GameStop was Infamous for its lowball trade-in program offering customers three to five dollars in store credit or cash for a game and then selling that exact same disk and box a day later on the same shelf for fifteen to thirty dollars the only other way to get a better deal for your used game was to Source other offers but driving all over town just to scrounge a few more bucks was rarely worth the time and trouble most big box toy and consumer electronics stores didn't offer a trade-in program as pre-owned video games were just too small of a market for them to believe it was worth the hassle alternatively you could list on eBay or Craigslist but you would have the overhead of coordination shipment and payment for every single title while GameStop's trade-in program was a known rip-off they were still the fastest and most convenient for players you would stop at GameStop regularly anyways so you might as well liquidate then and there at the same time there was growing demand for used video games in the mid-2000s gaming was a niche activity and the console Wars between the PS2 Xbox and GameCube were polite by today's standards every console launch is like a reset of the adoption curve whenever a new generation of consoles come out early adopters will always rush in to get the latest and greatest despite limited launch lineups and with the understanding that it will take time for Studios to develop titles that will properly utilize the new hardware as adoption of current gen consoles increase over time the prior generation naturally becomes more accessible in the mid-2000s greater volumes of pre-owned ps2s GameCubes and Xboxes naturally flooded the market at lower prices as early adopters swap them out for PS3s Wiis and Xbox 360s this in turn created great demand for pre-owned video games as more people could afford gaming and would be on last gen Hardware for the market majority of casual budget conscious consumers pre-owned consoles and games were a major entry point into gaming in the 2000s GameStop's business was to monetize the early adopters and the broad Market majority GameStop would make some money selling to hardcore Gamers who wanted the latest and greatest when these hardcore Gamers migrated to newer consoles GameStop would recollect or repossess through trade-in all the same video games and Hardware of the last generation for rock bottom prices that had initially sold at new and full price to these same players GameStop would then make even more money reselling these pre-owned video games and consoles at greater markups to the Casual audience in the mid-2000s GameStop sold new titles at an average retail price of 41 and pre-owned titles for 18 casual gamers thought they were getting a great deal buying a used game for less than twenty dollars while GameStop laughed its way to the bank having sold a pre-owned Game for 18 that bought off someone else for five dollars pre-owned video games were like a perpetuity for GameStop in that no matter how many owners a title went through as long as the discs still worked there would be some profit for the company to squeeze out on every single Exchange this is why scale was so critical to GameStop's business model beyond the usual more stores more customers having a location in just about every major strip mall or shopping mall meant that it could accumulate and flip as many pre-owned video games from and to as many players as possible it was easy to scale as each GameStop store was on average just 1500 square feet which for context is smaller than a tennis court smaller than a Starbucks at about the same size as a Subway due to its bare bone tenant requirements and needing just four walls a roof air conditioning and electricity GameStop was able to find and fit into established commercial areas cost efficiently around the world gaming enthusiasts would organically seek out and populate the locations around them to cultivate a sense of belonging and Community gaming by nature is a private activity and GameStop brought much needed visibility to gaming with compact stores and high density areas that were more public more integrated and higher traffic than the conventionally isolated hobby stores GameStop strategy in the mid-2000s was equally ambitious the company saw itself as not just a retailer and destination for gamers but also a promoter while GameStop's main business was selling video game products new and old it also earned money in advertising GameStop was the company behind Game Informer a subscription magazine that captured the latest launches and Industry developments every month in the era of print media gaming content was nearly impossible to find and teenagers like myself would hunt bookstores for Game Informer after school and pour over every page and picture whenever we were lucky to find a copy that wasn't sealed the company sold ad space within the magazine and its stores to Publishers Studios manufacturers and Distributors GameStop scale reach and influence with Gamers made the company a critical partner for the industry every publisher in studio wanted to stay on GameStop's good side and would regularly allocate higher quantities of the latest consoles and titles along with price protections and return privileges that other retailers did not get so easily GameStop enjoyed its most dominant era from 2004 to 2012. this period from the mid-2000s to early 2010s is what some would consider to be the Golden Age of gaming where video games made great leaps in graphics performance and gameplay consoles were positioned as home entertainment devices for the entire family and Publishers were financing Studios and IPS of all kinds from Gears of War and Twilight Princess in 2006 Halo 3 Call of Duty 4 and Wii Sports in 2007 Super Smash Brothers Brawl and GTA 4 in 2008 Modern Warfare 2 and Uncharted 2 in 2009 Halo reached Starcraft 2 and Black Ops in 2010 Skyrim and Dead Space 2 in 2011 are just some of the notable AAA titles in that six-year span to help pull gaming into mainstream attention and ignited serious discussion over video games as an art form GameStop was a massive beneficiary of this Golden Era where video games shed their stereotype as Niche obscene time-wasting button Mashers for solitary male teens and into mainstream mature cinematic engrossing and uniquely interactive entertainment that anyone could enjoy GameStop's overall Revenue surged 200 percent from three billion dollars to 9.5 billion dollars in total sales in
these six years thanks to the Golden Era and this underlying evolution in gaming the company's rapid expansion around the world paid off in 2006 the average GameStop store grows 688 thousand dollars a year in net sales by 2012 the average GameStop store was grossing 1.44 million dollars a year a 110 increase in sales on a per location basis the adoption curve can be seen at a micro level when we break down GameStop's annual sales into three categories new consoles new video games and pre-owned consoles and video games when we look at new console sales you can trace the years in which that business line predictably jumped upwards whenever a new generation of consoles debuted new consoles had been a 500 million dollar business in 2004 but accelerated to a billion dollar business by 2010 thanks to the mainstream success of the Wii the Xbox 360 and the PS3 as each generation of consoles got older the rate of adoption measured in sales would naturally Peter out over time new console sales on average accounted for just 18 percent of sales every year even in GameStop's most dominant era new video game titles were the biggest contributor to revenue representing on average 41 of the annual Top Line sales of new video games grew 500 from 600 million dollar business from 2004 to a four billion dollar business in 2012 thanks to the commercial success of mainstream franchises like Call of Duty Halo Oblivion Fallout and Grand Theft Auto the pressure was on the studios and Publishers to develop and release games that Gamers would want to buy every year at full price so GameStop was just the retailer the final middleman between the publisher and the player use video games and consoles were the second largest business segment for GameStop used video game products Grew From a 400 million dollar business in 2004 to a 2.6 billion dollar business by 2012. like all middlemen between consumers and suppliers retailers themselves fundamentally don't make that much money even though new console sales were a billion dollar business during GameStop's dominant era gross profit for new console sales was in the low single digits of six percent from 2004 to 2012.
this is expected as Hardware is needed to consume software thus both the retailers and manufacturers like Nintendo Sony and Microsoft are all incentivized to keep the barrier to adoption as low as possible in order to sell video games in 2010 it was reported that for each video game sold at full price roughly 15 of that sixty dollars would go to the retailer like GameStop or Target this cited number is consistent when we look at GameStop's gross profits for new video game sales on average GameStop enjoyed a 21 gross profit margin on the sale of new video games every year from the mid-2000s to the early 2010s predictably GameStop's greatest profits came from the sale of pre-owned video games and consoles where the retailer enjoyed 47 gross margins every year the heavy markups from the pre-owned video game business was the main driving force pulling up the company's gross margins to the 27 to 28 range and operating margins to the six to eight percent range every year but right after the early 2010s GameStop entered into its second era a six-year plunge downwards of struggle and strife from 2013 to 2019. the industry would evolve once more but this time it would no longer favor the retailers like GameStop there were three major shifts in gaming during the mid-2010s the first was the technical advancements in home internet connection from dial up to broadband which enabled digital delivery over physical distribution the second was the absorption of the Casual handheld game Market by the iPhone and the Apple App Store which provided the business blueprint and the technical inspiration for Publishers to de-platform GameStop and create wild Gardens of their own and the third was the change in the form of video games from predominantly single player titles to multiplayer first titles since the late 2000s Publishers and Fanboys alike had been locked in a bitter high profile and largely pointless War over whose console was the best by the mid-2010s these same Publishers who financed the development of video games realized that pressing platform exclusivity and dividing the consumer base was bad business for everyone with the greater accessibility and the growing demand for online play it was more profitable to develop and release multi-platform multiplayer titles which enjoyed higher lifespan replay value and sales over polished single-player exclusives that could only be consumed once Improvement in connectivity and the maturity of the console system software fueled the rise of DLC which enabled Publishers to engage in direct and continuous post sales monetization Nintendo Sony and Microsoft All Began pushing Gamers to not only access DLC post launch but also to buy and download entire games over the Internet once Publishers got over their initial concerns around piracy more content was made available on the Xbox Live PlayStation Network and Nintendo network and more consumers jumped on to acquire games digitally as there was no price difference from retailers and no greater convenience than hitting a button on your couch direct digital distribution also empowered Publishers to embed drms so that each digital copy of a video game could only be consumed by the exact buyer and was non-transferable the move away from physical distribution and towards digital delivery by both Publishers and consumers Shrunk the new video game sales market and the pre-owned video game sales market for all retailers not just GameStop but at the same time there was no other retailer in the world that was as vested and deep in gaming as Gamestop rather than burying its head in the sand GameStop did its best to proactively protect its business through this period of Rapid change in the mid-2010s the company attempted to fill in the few cracks where the publisher virtual storefronts had not reached they sold physical prepaid Xbox Live and PSN cards alongside codes for DLC for customers who wanted to pay for such items with cash or store credit and didn't have a credit card quote we believe we are the only significant brick and mortar retail seller of DLC and that we are frequently the leading seller of DLC for most game titles the Strategic specialization that had made GameStop so dominant and Unstoppable half a decade ago now seemed like a dangerous blunder GameStop had all its eggs in one basket and the industry was clearly leaving it behind in high school you can be a two sport athlete but you need to be outstanding at one in order to make it to the pros these were some of the words of wisdom that an executive recruiter shared with me in my time in Corporate America and applies well to GameStop's second era of struggle in response to seeing the studios and Publishers moving against them the company opted for Rapid diversification through M A the issue here is not so much the amount of money burnt on M A but more so what that money was spent on the blunder that GameStop made was that all of the companies it acquired to reduce its Reliance on gaming were all equally fragile middlemen businesses that were facing the same pressures and consolidation that was happening in gaming while we have the benefit of hindsight revisiting decisions made a decade later there were plenty of prominent public signals at the time that each of these Acquisitions would be deeply problematic and offer very little upside in 2010 GameStop bought out congregate a portal for free to play browser games compared to miniclip or addicting games congregate was unique in how it Incorporated social elements players could converse with each other across hundreds of moderated chat rooms while they played Flash Games as with the case with most Flash game players back then a significant portion of the user base were either poor students that couldn't afford real video games they lived in households that ban consoles or they were just young adults that wanted to kill time at work in an attempt to monetize a user base that had more time than money congregate rolled out its own virtual currency but it predictably never caught on even in my many years on the site regardless GameStop boasted that congregates 15 million monthly active users and its virtual currency efforts would be a critical step towards GameStop becoming a publisher itself and winning the Casual Market the central problem with GameStop's acquisition of congregate was not the underage difficult to monetize low-value user base but rather the deprecation of flash two months before the acquisition Steve Jobs penned an open letter announcing that flash would not be supported on iOS due to security and performance issues while the initial public reaction was correct and that jobs had ulterior motives with this move his technical rationale was still sound flash was equally unstable and unusable on Android in 2010 the mobile web and smartphones were already established fast-growing future-proof markets with consumers lining up around the block to get the latest iPhone 4 and the Samsung Galaxy S despite the clear signals that flash would not work on the mobile web that mobile would outpace desktop and that there were deep architectural problems with flashes of Technology GameStop still pressed forward with its multi-million dollar acquisition of a desktop Flash game portal just one year after GameStop's acquisition of congregate Adobe announced that flash would be placed on maintenance with no further investment killed Flash on Android and told all developers including the ones who were making Flash games for congregate to switch to HTML5 the death of flash spelled the death of browser games and by extension congregate making the acquisition as pointless as the technology itself in 2011 the same year that twitch was founded GameStop bought out spawn Labs a small startup who was attempting to build a video game streaming service just three years later GameStop decided to abandon spawn labs in 2014 and take a 20 million dollar write-off citing a quote lack of consumer demand for video game streaming services the same year that twitch was acquired by Amazon for nearly a billion dollars in cash in 2012 GameStop bought out Simply Mac an authorized Apple reseller and repair shop for 10 million dollars simply max value proposition was to fill the void in less populated areas where Apple themselves wouldn't open Apple Stores so like the remote suburbs of Wyoming Utah Oregon Texas and Florida were all places that had Simply Mac stores and not Apple stores in 2013 GameStop Diversified even further with the acquisition of an ATT reseller by the name Spring Mobile for 60 million dollars two years later in 2015 the purse strings were loosened once again with a 140 million dollar purchase of ThinkGeek a retailer that specialized in Tech and pop culture merchandise in 2016 one year later GameStop bought out two more ATT resellers in cellular world and Red Sky Wireless for 400 million dollars in cash GameStop's philosophied behind all these Acquisitions was that the company could extend its successful and proven model of buy sell and trade from gaming and into other markets like consumer electronics and wireless services with clear visible consumer demand for Apple products gadgets and cellular data GameStop believed expansion to these positive keger markets to be safe Investments quote during the past few years we have transformed from the world's largest retailer of physical video game products into a family of retail Brands selling many of the world's most popular Technologies and pop culture products our vision is to continue to expand our business as a global family of specialty retail Brands our goal is to have 50 or more of our operating earnings come from sources other than gaming GameStop's biggest mistake in its second era was misinterpreting its own success the company believed its greatest strength was the buy sell and trade model that all it had to do was apply that to adjacent growing verticals what GameStop failed to understand was that its success was a function of the domain that it had chosen to specialize in gaming when gaming evolved from a niche activity into mainstream popularity the company had placed itself in a great position to capture all that value with the Goodwill and expertise had built between consumers and producers in that industry for many years prior entering mainstream mature markets within trench competition and pursuit of diversification only ended up dragging GameStop further and further away from its gaming routes and towards bloat and efficiency and imbalance selling video games at T phone plans Apple products and pop culture merchandise are four completely different ball games GameStop's Top Line in its second era of struggle was unsurprisingly volatile with Revenue jumping in both directions year over year as the company sunk itself deeper into M A even with the added sales from its various subsidiaries like Simply Mac Spring Mobile and qriket wireless GameStop's overall Revenue in the mid-2010s never reached the same Heights as it had in the era of dominance the most frustrating aspect for company leadership was likely the painful reality that the overall profit margins were no better than before it was like the company had spent hundreds of millions of dollars of cash expanding to New Markets just to enjoy some short-term sales boosts and nothing else the gross margins reselling Apple products and at T services were high at 50 to 70 percent even the gross margin on ThinkGeek toys were better than that of GameStop's video game business but Dollar Wise sales from these contrasting business divisions were simply never enough to pull up the company's overall margins the challenge was that what GameStop thought were safe Positive Growth markets to do business in turned out to be saturated and competitive as many other companies had the exact same idea with so many new entrants the earning productivity in those verticals dramatically dropped even though from the outside it still looked like a big growing business this left companies operating in these spaces with high margins on paper but low net earnings after deducting the heavier costs of operations and customer acquisition because of just how much it took to capture the next sale to fuel the dollar growth of its ATT and apple subsidiaries in the hopes of pulling up its video game business GameStop put its foot on the expansion pedal in the span of four years Simply Mac and Spring Mobile Grew From a 300 million dollar business combined to an 800 Million Dollar business both retailers grew 500 percent in four years from 200 locations to over 1 300 locations nationwide since no one not even China can build that fast such speed is only possible through consolidation the 400 million dollar cash buyout of cellular world and Red Sky Wireless in 2016 was the premium that GameStop paid to achieve such blanket coverage so quickly and yet despite becoming the Nationwide Monopoly in at T sales Wireless services at its peak contributed just nine percent of GameStop's Revenue after posting volatile earnings and net losses throughout the mid to late 2010s GameStop was stretched too thin to continue business and maintain exposure in so many adjacent markets by 2019 the company had divested itself of Simply Mac congregate Cricket Wireless and their entire ATT division quickly settling with Buyers on a price equivalent to each business's annual revenue 2019 would Mark the arrival of GameStop's fifth CEO in just two years the diversification strategy that the company had embarked on in 2013 had devolved into a ball of yarn passed like hot potato from one CEO to the next free of bloat and with a return to gaming GameStop would now enter its third and present day era of web 3 led by the retail investor cultiro Ryan Cohen the removal of the at T and apple divisions revealed just how much GameStop's core video game business had regressed over time the 2010s had been ruthless for GameStop as Publishers had continued their Relentless optimization of digital delivery monetization practices and direct to Consumer sales these days it's no longer just the big Publishers of Sony Microsoft Nintendo and valve but also the smaller players like epic games Rockstar Ubisoft and Activision each building up their own walled Gardens taller than the next GameStop's Revenue now exclusively reliant on just its video game business has dropped from eight to nine billion dollars to just five to six billion dollars a year the average GameStop store in 2022 makes far less than it did 10 years ago with each location sales now at roughly 1.3 million dollars without even adjusting for inflation Ryan Cohn has made no secret of his intent to reinvent GameStop as an asset light tech startup with software margins stores have been reportedly stripped down to a skeleton crew assignments of just one employee per location and internal rumors are that the company plans to go online only with no more brick and mortar Presence by 2025. to emulate Silicon Valley in every aspect GameStop has opted to reduce transparency and to provide as little data as possible in its financials to prevent any outside evaluation of the company's business the company no longer breaks down its video game business by new or pre-owned and the profit margins are no longer provided by business line instead GameStop blurs everything into generic categories of software hardware and collectibles making it impossible to answer any question like how much money is generated by its nft Marketplace when that same revenue is intentionally blended with sales from toys and trading cards regardless of whether or not one believes that nfts are just jpegs for the rich and gullible or digital assets of the future GameStop can't hide that it's blockchain Marketplace is its last big bet the fundamental problem today is that GameStop's exchange is just one of hundreds floating around these days new exchanges pop up every month to compete with established incumbents like open C and blur with some even pushed by organizations with greater relevance and penetration than GameStop like reddit's vaults NBA Topshop NFL all day magic Eden and wearable exchanges initially differentiated themselves on the quality and the perceived Prestige of the artists creators and collections that they attract like Doodles board ape Yacht Club crypto Punk and azuki but as more exchanges have entered the scene and collections can be bought largely anywhere the new sticking point is cost blur has recently overtaken openc in trading volume and market share by appealing to users through lower cost and subsidizing trading fees to zero adding royalty fees and building intangible economic incentives for platform loyalty but the greatest mistake that many people make these days is not understanding that software can become a saturated competitive and commoditized as any traditional offline in-person service or product business GameStop's current journey to secure a brighter profitable and exclusive future in the virtual world of pixels will not be any less expensive challenging volatile and unforgiving as the one it has endured in the physical world of atoms for the past 20 years
2023-05-06 05:17
